Jeremy Grantham: Commodities Due For A Breather; Stay Defensive

By Murray Coleman

Value investor Jeremy Grantham, chairman of Boston-based GMO LLC, says that he’s sad to finally be vindicated over his forecast that the U.S. faced “seven lean years.”

The long-time institutional money manager made that prediction some two-and-a-half years ago. In his December letter, which I just got via email today, Grantham laments:

“The U.S., and to some extent the world, will not easily recover from the current level of debt overhang, the loss of perceived asset values, and the gross financial incompetence on a scale hitherto undreamed of.”

He also warns that aside from lean times continuing, the U.S. and the developed world have “permanently slowed” in their GDP growth. Grantham says:

“This is mostly the result of slowing population growth, an aging profi le, and an overcommitment to the old, which leaves inadequate resources for growth. Also contributing to the slowdown, particularly in the U.S. and the U.K., is inadequate long-term savings. As I write, the U.S. personal savings rate has fallen once again below 4%.”

Grantham also points out that the S&P 500 (SPY) has “hung in” and staged rallies recently whenever bad news eased. Why? He points to behavioral factors, suggesting that when investors feel good, whether their material situation has changed or not — they tend to wade back into the market.

Grantham also continued to recommend that investors remain defensive. He noted that a quarter ago his advice was to avoid low quality U.S. stocks and consider global equities, which were getting cheap at the time. “Back then, we became net buyers of equities — actually, better described as nibblers — for the first time since the spring of 2009,” Grantham wrote.

Grantham is favoring resource-minded stocks and investments, although he sees “a major short-term decline in commodities.” That prognosis comes from weather forecasts and demand currents coming from China. He wrote: “I believe chances for further price declines in resources are still better than 50/50 as China and the world slow down for a while, and the weather becomes a bit more stable.”

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.